A Compelling Estate Planning Solution

Segregated funds (seg funds) have been a long-misunderstood investment solution in Canada. Misperceptions about costly fees and features have epitomized how many Advisors have viewed them, resulting in their exclusion from client portfolios. The reality is – if you’ve not taken the time to consider this useful business building tool, you may have overlooked some key executorship benefits for your clients, particularly now as Baby Boomers seek ways to efficiently transfer wealth to the next generation.

3 ideal client segments, 3 optimal use cases

When asked by Advisors to pin-point the ideal clients for seg funds, I’ve historically identified three distinct segments as the ones who can benefit the most.

1. Business owners seeking creditor protection for their personal non-registered assets
2. So-called “GIC refugees” – risk-averse investors who traditionally invest in GICs, but are looking for alternative solutions in today’s ultra-low interest rate environment
3. Seniors/retirees aged 70-85 looking for estate protection

It’s this third category – estate planning – that offers the most compelling case. And that’s due in large part to the ability to take non-registered assets, name a beneficiary on those accounts and then bypass probate, thus providing greater control for your clients on how their assets will be paid out from their estate. And in some circumstances, expediting this payout (which can happen in as few as two to three weeks) eases potential stress by helping to cover near-term expenses.

There are many inherent elements that make them an ideal investment option from an estate planning perspective. For starters, your clients can name multiple beneficiaries outside of their registered plan, enabling them to direct funds specifically to those they want to take care of (or their philanthropic causes) when they’re gone.

Secondly, this non-medical insurance solution also provides the added benefit of privacy for beneficiary recipients; unlike a public will, no one will know who has received the funds, or the amount bequeathed.

Finally, the maturity and death guarantees associated with seg funds can also provide peace of mind for your clients as they get older. As a result, they can have some certainty that their assets will not diminish in any substantive way before they pass, protecting the legacy they’ll be leaving behind.

Myth-busting: Fees...

One of the more common myths about seg funds is that MERs are much higher than those associated with traditional mutual funds. The BMO Guaranteed Investment Funds (GIFs) lineup is highly competitive with most investment products, from a pricing standpoint.

As an investment/insurance hybrid solution with three different guarantee options (and a variety of portfolio options targeted to client risk level), the most common BMO GIFs provide a hard floor on returns with a 75-100 repayment guarantee – 75% maturity/100% death benefit, which will pay out a lump sum. In a balanced mandate, for example, the MER would be 2.60% – and $250,000 would be the point at which they become more competitive, and a more impactful estate planning option, as the fee drops to 2.36% — in line with the average Canadian mutual fund.

What makes the BMO lineup highly competitive is that we use ETFs as the underlying assets to reduce cost, improve liquidity and more effectively hedge maturity risk guarantee. Being the second largest manufacturer of ETFs in Canada (and number one for net inflows over the last 10 years²) also helps to make our funds more attractive – an advantage over those who must seek out a partner in order to include ETFs in their seg funds, thus adding to the fees on their products.

… And other costs

Advisors should also note that bypassing probate – a key benefit – saves more than just those specific fees, which are often, in fact, not exorbitant. From my perspective, the more “costly” and overlooked element when settling an estate is time.

Completing probate in Ontario has historically taken around 18 months. In the current pandemic environment, where things have slowed down noticeably, it could potentially take two years for anything but the simplest case. Contrast that to seg funds, where beneficiaries are often paid within two to three weeks following the presentation of a death certificate. And even in Quebec, where probate is not a requirement, the waiting period can be lengthy and therefore just as burdensome; civil code does not set a particular timeframe for settlement, and the process is dependent on complexity.

However, timeframe isn’t the only consideration when contemplating probate; executor, accounting and legal fees are often substantive expenses worth making note of. When you add these up, they become more meaningful. That’s why investment professionals need to think broadly when considering the full implications of these estate costs.

It’s critical to be informed

Given the complexity of the estate planning process, and the variety of products available to clients, like testamentary trusts, it’s critical to be informed.

When it comes to BMO GIFs and the topic of investable assets, while $250,000 is the entry point where MERs become more cost-effective – in my experience the top end is up to approximately ~$3 million, beyond which your ultra-high net worth clients likely have more complex needs, with formal or informal trusts in place. That said, like most investments, seg funds are not an all or nothing solution.

It’s important to note that seg funds can’t be purchased by investors on their own on a self-directed basis. This offers you the chance to incorporate an enhanced insurance strategy into the conversation and increase your value add. By proactively educating clients and their beneficiaries on the advantages – particularly as a means to transfer wealth – you could not only retain those entering their estate planning years, but also help to create a next-gen relationship. (Pro tip! This can work in both directions – also ask the pre-retirees in your book, who are beneficiaries themselves, about their parents’ estate/retirement plans as a way to open the door to onboarding those prospective clients.)

For Advisors looking to estate planning and intergenerational wealth transfer ideas as a means to grow their book of business and solidify their revenue stream, seg funds offer both you and your clients a compelling investment/insurance hybrid solution worth considering. And by incorporating them into your practice, you can add tangible value for your clients, and the legacy they want to leave behind.

To learn more about BMO Guaranteed Investment Funds, contact your BMO Global Asset Management Regional Sales Representative.

To learn more on our full suite of BMO GIF investment strategies, click here.

¹ Statistics Canada, 2020.

² Bloomberg, December 2020 – BMO ETFs highest inflows 10 years in a row in the Canadian ETF industry.

³ Any amount that is allocated to a segregated fund is invested at the risk of the policyowner and may increase or decrease in value.